MFRI An Undervalued Stock Missed By This Market

The markets had an amazing bull run in 2013. Many stocks have had nice runs and even some that were not profitable. In 2014 it may be more of a stock pickers market and finding undervalued companies may be rare as many stocks enjoyed a healthy 2013. I believe I have found an undervalued stock that remains in MFRI Inc. (MFRI).

MFRI is a multi-line company engaged in the following businesses:

Perma-Pipe Inc.

Global Leader in Pre-Insulated Piping & Leak Detection Systems

Perma-Pipe Inc. is the largest manufacturer of pre-insulated piping systems for District Heating and Cooling in North America, and a Global Leader operating six (6) strategically placed manufacturing facilities worldwide. Our full product line also includes pipe-in-pipe containment systems for environmental control of hazardous fluids, subsea oil & gas pipelines and equipment, above and below ground insulated piping systems for industrial applications, liquid leak detection and location for our piping systems and stand-alone applications such as computer rooms and data centers.

MFRI results are impressive and unnoticed. For the first 9 months of fiscal 2013, YTD net sales of $173.5 million increased 31% from $132.1 million for the prior-year period. Piping Systems sales increased 76%, or $53 million, due to the previously mentioned projects in Saudi Arabia. Filtration Products decreased by $11 million due primarily to reduced domestic demand for fabric filter bags.

EPS from continuing operations was $1.90 for the first 9 months of fiscal 2013 as compared to a loss ($0.55) for the same period in fiscal 2012.

The company's backlog from continuing operations increased 9.3% or $8 million from October 31, 2012.

President and CEO Bradley Mautner commented, "The demand environment for Piping Systems remains active and we are now pursuing a wide variety of promising opportunities worldwide of varying size and duration with the aim of diversifying our business from a product, project and geographic point of view. We are also pursuing certain ventures that offer the potential over the long term to replicate the success we have had in the Middle East.

Risks for MFRI would be slow replacement of their backlog. However, the CEO seemed optimistic in his comments. Additionally, MFRI has only 7.08 million shares outstanding and a public float of approximately 6 million shares. Lower share structure stocks can be volatile in trading and subject to extreme moves.

A comparable company for MFRI is Donaldson Company, Inc. ( DCI ). DCI is a leading worldwide provider of filtration systems and replacement parts. Founded in 1915, Donaldson is a technology-driven company committed to satisfying customer needs for filtration solutions through innovative research and development. Donaldson serves customers in the industrial and engine markets, including dust collection, power generation, specialty filtration, compressed air purification, off-road equipment, industrial compressors, heavy trucks and light vehicles.

Comparing MFRI and DCI to me shows how undervalued and unnoticed the MFRI results are. DCI did $1.64 in EPS in the most recent fiscal year and trades at $43.46 for a P/E ratio of 26.5. MFRI had more EPS in the first 9 months of fiscal 2013 than DCI had all year. MFRI did $1.90 EPS for the first 9 months of FY 2013. The third quarter was exceptionally strong so assuming that the fourth quarter results would be more like the first two, MFRI may be on track to have EPS of $2.35 for fiscal 2013. MFRI is trading at $14.35 so that is a P/E ratio of 6.1. A 10 P/E ratio on $2.35 of EPS would be a stock price of $23.50. If one were to apply the DCI P/E ratio of 26.5 to $2.35 of EPS , that would be a stock price of $62.28. Therefore it is easy to see why I think MFRI is an undervalued EPSstock that remains after the bull market run of 2013.